ECON 3100 Test 2

Input flexibility

Firms can usually obtain a particular output by substituting one input for another (not by a fixed rate)

How do Isoquants help frims?

Help them choose btwn different K and L combinations for a certain level of output

short-run expansion path

Horizontal, less flexible, same amount of output can be produced for cheaper in the long run

Marginal Cost (MC)

INCREASE in cost resulting from the production of one extra unit of output.

The short run is defined as a period in which:

at least one input is fixed

What is MP when output is maximized?

0

3 steps to move from expansion path to cost curve

1. Choose an output level represented by an isoquant. Then find point of tangency with an isocost line. 2. From chosen isocost line, determine the minimum cost of producing the output level that has been selected 3. Graph the output-cost combination

Over time, it is likely for AC to rise while producing an increased level of output because

1. In Short Run, fixed inputs such as factory space/machinery can cause workers to work inefficiently 2. managing a larger firm can be complex and inefficient 3. Advantages of buying in bulk may have disappeared once certain quantities are reached.

What generally happens when a firm increases outputs?

AC decreases because of 1. Worker specialization 2. Flexibility provided by work scale 3. Acquiring production inputs at lower cost bc you are buying in bulk

What is slope of secant line joining the origin to the point in the product curve (TP)

AP

When AP is DECREASING...

AP > MP

Accounting cost (explicit cost)

Actual expenses PLUS depreciation charges on K equipment.

Short Run Average Cost curve (SAC)

Curve relating the average cost of production to output when the level of K is fixed

Long Run Average cost curve (LAC)

Curve relating to average cost of production to outputs when all inputs, including K, are variable

Long Run Marginal Cost curve (LMC)

Curve showing the change in long run TC as output is increased incrementally by 1

Law of diminishing returns refers to:

Diminishing marginal returns

Difference between returns to scale and economies of scale?

Economies of scale is a concept of cost, RTS concept of production (Q)

If we take the production function and hold the level of output constant, allowing the amounts of K and L to vary, the curve that is traced out is called:

Isoquant

What happens to isocost lines as the price of labor increases?

It becomes steeper

What is slope of tangent line to Total Product (TP)?

MP

Rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the

MRTS

Slope of an isoquant at any point measures

MRTS

When isoquants are straight lines

MRTS is constant and L/K are perfect substitutes

The slope of TP curve is...

Marginal Product (MP)

For many firms, capital is the production input that is typically fixed in the short run. Which of the following firms would face the longest time required to adjust its capital inputs?

Nuclear Power Plant bc capitol investment is highest

Slope of the isocost

Price ratio between labor and capitol

Fixed input

Production factor that cannot be varied (usually K but can be L)

Law of Diminishing Marginal Returns

as the use of an input INCREASES with other inputs fixed, the resulting additions to output will eventually DECREASE

Where does MP cross AP?

at MAX of AP

A firms expansion path is:

a curve that shows the least-cost combination of inputs needed to produce each level of output for given input prices.

Marginal Product (MP)

additional output produced as an input is increased by one unit

If the law of diminishing returns applies to labor then

after some level of employment, the MP of labor must fall

Long Run

amount of time needed to make all production inputs variable

Expansion Path

curve passing through points of tangency between a firm's isocost lines and its isoquants (shows optimal decisions on K and L at different levels of output)

Isoquants

curve showing all possible combinations of inputs that yield the same output

DMR for L if we hold K constant and

each additional unit of labor generates less output

Theory of a firm

explanation of how a firm makes cost-minimizing production decisions and how its cost varies with its output 1. Production Technology 2. Cost constraints 3. Input choices

Economic cost

explicit + implicit costs

Isoquant map

graph combining a number of isoquants, used to describe a production function

Isocost line

graph showing all possible combinations of L and K that can be purchased for a given total cost

The isocost line reveals

input combinations that can be purchased with a given outlay of funds.

When an isocost line is just tangent to an isoquant, we know that

output is being produced at a minimum cost

Average Product (AP)

output per unit of a particular input

The production function shows q=F(K,L)

the highest output that a firm can produce for every specified combination of inputs